Buy, Build or Partner?

In Praise of Collaboration

Every large firm on the planet is thinking about using digital technology to update, upgrade and improve its business; even the Vatican is having a digital makeover: Digitavaticana is their latest effort, digitising their enormous vault of historical manuscripts.

It is therefore unsurprising, as confirmed by a recent Accenture study, that 97% of large businesses and 82% of entrepreneurs believe that digital innovation is critical to their long-term success.

It’s a bit of an understatement that digital innovation is not easy, especially if it requires big, established (and often still successful) businesses to change their ways. In practice, most large firms are well able to answer the “why”, “when” or “what” when defining innovation. What many struggle with is the “how” question: because ideation is often easy, implementation never is.

When it comes to innovating, firms have three high-level options for implementing new digital offerings: build, buy or partner, and each choice comes with its own set of implications and challenges.

Build

Building in-house capabilities is almost always the first option explored by a large business. In theory if done well, it can deliver a proposition that fits exactly with the needs of the organisation, it can also be cheaper and delivered more quickly than other choices. Most importantly, it can provide a competitive advantage as (in principle, at least), no competitor will have an identical proposition.

Reality is often very different. When looking at digital change most traditional businesses do not have the right depth of expertise in-house. Most times building digital innovation in-house has two distinct phases. The first is to build capability — by hiring or training — and the second is to build and roll out the proposition. Both of these phases can be complex, time-consuming and relatively uncertain in outcome.

When considering “build” it is important to keep the following considerations in mind:

Competitive Edge: If internal innovation succeeds the business can find itself with a unique differentiator vis-à-vis the competition. This is often the main driver to building innovation in-house. The truth is that competitive advantages are very rare and when they happen they are hard to sustain. The only real edge comes from continuous innovation.

Skills: Are the right skills available in the business? Lack of digital talent is a real problem. Attracting and retaining knowledgeable individuals can be even harder for a large business, as the more qualified individuals often do not want to work for established “traditional” corporates.

Timing: How long will this take? If talent is available this can be quick but if not, recruitment will add to deployment times.

Culture Clash: Will our culture support the change? Many established firms are proud of their strong cultures. These cultures are consistently at the core of what made a firm successful in the past. Will the business allow the development of something new internally without corporate “antibodies” slowly breaking it apart?

Costs: By definition innovation is something new and business may find it challenging to predict the costs of something it has not done before. This often results in innovation projects overshooting budgets and timelines.

Optionality: If the business decides to change direction, how hard will it be to disband or repurpose the new division and its team? How much will it cost to do so? Internal innovation can be expensive to unwind with impact that goes beyond the financial. For example, most established businesses have low tolerance for failure: how will the business treat colleagues involved in a venture that failed?

In summary, internal innovation can have its benefits but unless you have at least some of the skills required, time, money and a culture that tolerates potential failure, in-house builds should probably be avoided.

Buy

Another popular route to digital innovation is to buy or invest in a firm with the right expertise. Acquiring a going concern has a number of pros and cons:

Speed: Acquisitions can be very fast. A business can end up will a fully functional innovative division very quickly.

Costs: The capital outlay to acquire another business is usually larger that that required for an in-house build or partnering alternative.

Culture: The integration of a business that is already relatively fully formed with its own culture and ways of doing things may not be easy. Large corporates in particular are known for slowly neutering acquired businesses from within, gradually pushing key people out and stunting culture. One could end up with a business that is a shadow of what was acquired.

People: Talent in a smaller, innovative firm often does not like working for a bigger, more structured organisation. When buying a new firm, provisions are made to retain talent at the executive level; retaining people at lower levels is much harder and is often neglected. Will these people still remain in the business post acquisition?

Optionality: Once a business has been acquired it is difficult (and expensive) to change one’s mind about what to do with it. The cost of pivoting an acquisition’s business model can be very high.

Partner

One of the most far-reaching outcomes of the digital age is fragmentation. Increasingly, smart individuals are willing and able to set up small firms that provide product and services that are equivalent or superior to those provided by their much larger competitors. These firms, based on the creative coupling of the entrepreneurial skills of their founders and an intelligent use of technology, can be great partners for larger businesses seeking digital innovation.

Partnering is a very effective way of getting an injection of digital innovation enabling large firms to benefit from the fragmentation (or “uberisation”) of digital services provision.

Partnering has these characteristics:

Speed: It can very fast. By partnering with the right organisations a business can deliver a digital solution faster than most other options.

Costs: Compared with the other innovation options for the same proposition, partnering often requires smaller capital outlays than an in-house build or an acquisition.

Pivoting: Dealing with non-success (also known as failure!) is less difficult with partnering. Large organisations will find that unwinding a proposition delivered with third parties, more quickly and cheaply, easier than one that is owned, was a long time in the making and required a substantial investment.

Contracts: Compared to building in-house or an acquisition, the contractual requirements can be complex. Some of the key things to look for are: ensuring that everyone’s objectives are aligned, ownership of Intellectual Property and what happens in case of failure.

Optionality: One of the possible outcomes of a good partnership is that it can be a stepping-stone. A successful partnership can be the first step in building a successful innovative business in-house — or it can be the safest way to identify the right acquisition target.

In an ideal world, any business thinking about building new digital propositions should the carefully study the three routes available to them.

Choosing the right approach will have a direct impact on the potential of success of any innovation — so it’s best to choose a path that leaves more options open.

As a rule of thumb, if you are attempting to introduce innovation in an organisation that does not have the prerequisite skills and a business culture is risk-averse, go for partnering. Especially as, in most cases, it can be a path to doing in-house build and acquisitions right.